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I feel fortunate to live in Oklahoma at this perilous time. Oklahoma leads the nation in the rise of the average and median price of homes increasing. Oklahoma City home listings are only at 6% foreclosure or short sale where other areas of the country are over 50%. Unemployment has dropped to 3.5% which means it is at a level of full employment since 3.5% is the number of the hard core unemployed. The state has positive cash flow on virtually everything property you but at 20% down, so you can expect I am naturally biased toward positive cash flow versus flip. Let me give you an example. In the 1990's I flipped 20 properties at an average of $12,000 profit which was at a time Oklahoma was still suffering. However, the average price was $50,000 fixed up. It's hard to argue with $240,000 profit, but
also remember capital gains where at 25% or you paid normal taxes at that time when you sold. Had I help the properties, the average value now would be $140,000. That is $1.8 million in equity, plus I would have positive cash flow of around $96,000 per year, and the depreciation would be greater than the income! Yes, sometimes I do consider myself an idiot. I did invest much of the money made in other investments so it wasn't a total loss, but let me break down an example of how you build wealth conservatively though real estate where you can buy 20 properties and not pay taxes.
Here is how it works. First it always helps to buy undervalue. Starting with equity is great, especially if you are in an area like Florida that has a good chance of losing that equity in the next few years. Pay attention to inventory levels. If the average time it takes to sell the existing inventory which is called absorption rate is measured in years, then you have a declining market. Miami Florida has a ten year inventory so watch out. A $150K property in Oklahoma City has a 2.85 month absorption rate which means a bias toward appreciation. Not only that we are half the property tax rate of Texas, and more than half less the insurance of Florida. If you put 20% down you have positive income. For instance if it is $200 per month you don't pay taxes. This is because the house less the land is depreciated over 27.5 years. Lets say the $150K home has an improvement value of $135K then the monthly depreciation is larger than the cash flow. it also helps to buy in places like Oklahoma and Texas because unlike the coast, land values are low therefore your depreciation is greater. Even if the appreciation is only 4% per year, after five years you have enough equity to buy two properties with the sale of one, because you bought under value in an appreciating state unaffected by the sub-prime meltdown. And you won't pay taxes on the sale because of a special government sponsored program.
It is called a 1031 tax deferred exchange. The government allow you to defer taxes if you invest all your equity and buy for more than the sale of your home. Now you have two sources off tax deferred income. Then 5 years later you could have 4 sources of tax deferred income, and depending on your age you can keep going. In other words, after an initial investment in one home, you can buy more over time without another penny. Of course you will have maintenance so there are cost, but buying right can put you in the black even with yearly expenses. If this works for you then you may want to buy more with extra money. The point is to create new sources of revenue that is not subject to the greed of Wall Street or incompetence of the government. Plus you have a tangible investment of bricks and mortar that has a long history of being able to access real value. Now that we have passed through the insanity of the recent real estate bubble, let's get back to the fundamentals of long term investments based on solid principles.
